Simple Steps to Shore Up the Your Back End in Escrow States:
To read the first half of this post, click here.
1. Treat escrow states differently than closing/wet states and put an escrow review process in place.
Escrow review should include receiving the original signed documents back from title/escrow and conducting of an audit of those documents and any outstanding conditions prior to issuing funds for disbursement. If there is missing documentation, make sure you get it before sending any money.
2. When issuing funds to the settlement agent, be sure to recalculate per diem interest based on the date funds are released and the actual recording date.
3. Confirm that funds were in fact disbursed on the day they were sent.
If for some reason funds are not disbursed same day, be sure to instruct settlement agent to return any additional per diem interest directly to borrower and provide evidence that this was accomplished.
4. Lastly, obtain a Final HUD from the settlement agent showing the accurate disbursement date.
The Final HUD is not required to be signed by borrowers in escrow states and is considered a trailing document that is obtained once the transaction is completed, much like the recorded docs and final title policy. You will also find this document to be very helpful when auditors come through your shop.
As a continuation to the discussion of Escrow States, let’s address CA specifically. Have you received an audit request from the CA Department of Corporations? Don’t worry…you will, especially in the current lending environment. Do you know what one of the first things they will evaluate is? OVER-COLLECTION OF PER DIEM INTEREST. Ask Wells Fargo about this one.
One of the major items to watch in the State of CA (or any escrow state for that matter) is the adjustment of per diem interest upon disbursement. Disbursement/funding of a loan is concluded by title/escrow on the day of recording. Many lenders not accustomed to lending in escrow states make the mistake of not ensuring per diem interest overages are refunded directly to the borrowers upon disbursement. Often times, title/escrow will return the overage in per diem interest to the lender, or in some cases, have the borrowers sign a disclosure releasing those funds to directly to title/escrow.
The CA auditors do not look favorably on either of these practices. It is the lender’s responsibility to instruct title/escrow to return any per diem interest overage back to the borrowers. If the money has been returned directly to the lender instead, it is then incumbent upon the lender to ensure the overage for per diem interest is returned to the borrowers. In my personal opinion and there may be some that disagree, it is never okay for title/escrow to keep the overages.
In cases where an audit is conducted, a lender’s entire pipeline extending back years can be evaluated. If per diem interest overages are discovered and no evidence can be produced to show overages were refunded to the borrowers as required, the amount of the overage plus interest at the rate of 10% interest per annum (Section 50504(b)(FC) must be refunded. This could add up to be quite costly, not to mention the fines that might be levied by the state.
There are a few simple steps that can be taken to ensure your company does not get caught up in this audit trap.
More to follow……
Are you thinking about doing business in an “Escrow/Dry” State or have you entered the lending arena in these states with little or no working knowledge of what “Escrow” State means? Do you know which states are classified as “Escrow” States? Do you understand the subtle differences in standard business practices within the individual states that are classified as Escrow States? Do you really know what you are getting in to?
The fact of the matter is that 86% of states operate as “Wet/Closing” states? This means that the loan will fund on the day of signing/closing in the case of a purchase or immediately after the 3 day right of rescission in the case of a refinance. Escrow states, on the other hand, have varied disbursement dates depending on the performance of escrow to the lender’s satisfaction. To put it more simply, the lender has the option to fund/disburse the loan once they are completely satisfied all conditions have been met to their expectation.
This control is definitely to the benefit to the lender in that they can make sure everything is perfect before funding the loan, but it can sometimes delay disbursement as much as 2 weeks. If the escrow process is not managed efficiently and effectively, you could end up reviewing files two and three times with borrowers sometimes having to execute entirely new document packages due to delays or losing the loan altogether. These delays or missteps lead to lost time, loans, and ultimately; MONEY.
Manage funding in Escrow States just like you would a “Closing/Wet” State you say?! Do you really want to go there or are you already feeling the pain of having made this type of decision?